US rate hike cycle over as inflation eases?

July 13, 2023 (MLN): The U.S. consumer prices rose at the slowest pace since 2021, easing the pressure on the cost of living, and possibly on the Fed’s unprecedented monetary policy, too.

With just a 3% YoY increase in June, inflation is now only one-third of what it was a year ago (9.1%), moreover, US core CPI on a sequential basis also increased at the slowest pace since August 2021, at 0.2% MoM.

However, this higher-than-expected easing in inflation is not actually as good as the number seems.

The YoY number at 3% may look impressive, but it is only this low because it is compared to the peak of 9.1% in the same month last year. This is what economists call “base effects”.

It is likely that inflation in the coming months could edge up slightly, as comparisons to last year become less and less favorable as we move forward, as inflation started to decline from June 2022.

Moreover, core inflation is still at 4.8%, way above the Fed’s 2% goal.

“None of this means it’s game over in the fight against price pressures — especially for the Fed, which is widely reckoned to be locked into another interest-rate increase later this month,“ Anna Wong, Chief U.S. Economist stated.

In the upcoming meeting on July 26, Fed will most likely raise the rate by 25bps.

CME FedWatch Tool shows a 92.4% probability of a 25bps rate hike for this meeting.

The current decline in CPI figures should not make the Fed overconfident that things will go well from here on out.

Fed Barkin at an event on Wednesday after the report said, “Inflation is too high. Our target’s 2%,”. “If you back off too soon, inflation comes back strong, which then requires the Fed to do even more.”

The labor market still remains resilient. Employers continue to add jobs at a robust pace and wage gains are still strong.

It is worth noting that, food prices, which have been a major burden for many households, stayed the same as the previous month.

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